Article
EBITDA normalisation before a sale: which adjustments hold up and which do not
The multiple is public, EBITDA is negotiated. The seller adds adjustments, the buyer strikes them out — and the price moves by the multiple times each one. Below: how to tell an adjustment that will hold from one that only prolongs due diligence.
Author: Tomasz FordymackiPublished:
Why P&L EBITDA is not enough
Accounting EBITDA describes the company as the current owner ran it: with his pay, his car, his write-off decisions and his one-off events. The buyer pays for the company as it will be after the deal. Normalisation is the passage from the first to the second — which is exactly why it is contested: both sides have an interest in moving the line their way.
The adjustment table: justified, debatable, unjustified
| Adjustment | Verdict | Condition / typical error |
|---|---|---|
| Owner pay above market | justified | only the excess over the rate at which a successor can be hired; the other way too — an owner working “for free” is a negative adjustment |
| Severance, settlements, closed disputes | justified | a document and a date; a pending dispute is a provision in the bridge, not an EBITDA adjustment |
| Private costs in the company (car, travel, family on payroll) | justified | an itemised list with invoices; “about 10 % of overheads” does not pass |
| One-off inventory or receivables write-off | debatable | if write-offs happen every year they are not one-off — the buyer will check three years |
| Related-party transactions (rent, services) | debatable | adjusted to the market rate in both directions; requires a market benchmark, not a declaration |
| Development, marketing, recruitment costs “above normal” | debatable | passes only with proof that the effect (product, team) is already in the company and needs no repeat |
| “Costs the new owner will not incur” | unjustified | that is the buyer’s synergy, not a feature of the company — the buyer does not pay the seller for his own savings |
| Lost revenue (“if not for the pandemic / breakdown / client”) | unjustified | revenue adjustments are rejected almost always; show them in a scenario, not in EBITDA |
| Normalising a “weak year” to the average | unjustified | that changes the basis of the multiple, not an adjustment — negotiated openly through the choice of period (LTM, 3-year average) |
A worked example
A services company, revenue PLN 31.6m, accounting EBITDA 3.4m, multiple agreed in the letter of intent: 5.5×. The seller presents nine adjustments totalling 1.1m — “adjusted” EBITDA 4.5m, price 24.8m. After passing through the table above: defended 0.42m (owner pay above market 0.25, severance 0.12, private costs 0.05), debatable 0.30m (a receivables write-off — checked over three years, it occurred once), rejected 0.38m (lost revenue, “costs that will not exist”). Result: EBITDA 4.12m, price 22.7m — 2.1m less than on the seller’s list, 4.0m more than without normalisation.
How to prepare an adjustment list that survives due diligence
- 1Number, amount, documentEach adjustment separately, referencing an invoice, contract or resolution. “Bundled” adjustments get rejected wholesale because they cannot be argued one by one.
- 2Three years, not oneA one-off adjustment must be one-off across three years. A write-off that returns every year is a cost of doing business.
- 3Adjustments in both directionsA list containing only positive adjustments loses credibility in the first minute. An owner working for a symbolic salary, below-market rent from family, no holiday accrual — these are negative adjustments, and better they come from the seller.
- 4Separate adjustments from the bridgeA pending dispute, tax arrears, a declared dividend are EV → equity bridge items, not EBITDA. Put among adjustments they count twice — against the seller once the buyer notices.
Calculator: the bridge from enterprise value to equity value
Frequently asked questions
Does the seller or the buyer do the normalisation?
Both — and that is fine as long as each has a documented list. The seller prepares it before the process (small-scale vendor due diligence), the buyer verifies it in due diligence. The conversation is short when the two lists differ by two items, not twenty.
Which period as the basis: the last year or an average?
The standard is the last twelve months (LTM), because it best describes the company the buyer will receive. A three-year average makes sense under high volatility — but then it is an explicit decision about the basis of the multiple, negotiated separately, not an “adjustment”.
Is owner pay always adjusted?
It is always checked, not always adjusted. The reference is the cost of hiring someone to take over the owner’s duties — with full employer-side contributions. If the owner takes 40k a month and a managing director would cost 30k — a positive adjustment of 120k a year. If he takes 5k — a negative adjustment, and the buyer will find it.
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